Annual Review – Corporate Fraud and Corruption

Financier Worldwide canvasses the opinions of leading professionals around the world on the latest trends in corporate fraud and corruption.

Corrupt and fraudulent behavior remains a pressing issue for businesses worldwide, with global authorities continuing to crack down on wrongdoing.

Even in relatively low-risk countries, the threat is growing. In New Zealand, for instance, there is evidence that fraud and corruption is on the rise. Several corruption scandals have also recently made headlines in Switzerland, increasing public awareness of such crimes.

Anti-corruption authorities in such 'safe' regions are giving greater thought to establishing clear policies and internal controls to help detect and deter such conduct. Canada's Corruption of Foreign Public Officials Act (CFPOA), for instance, was recently strengthened, and the country has seen several high-profile prosecutions in the past 18 months. But despite this action from above, the ever-changing risk environment makes bullet-proofing any business against fraud an impossible task. Rapid globalisation has opened up a much larger pool of potential victims to those who commit fraud, and technological advances make it easier to conceal the crime.

Ultimately, the responsibility to prevent corrupt and fraudulent practices lies at the feet of businesses and their boards. This message is starting to spread, particularly in the emerging markets. Senior executives in China, for example, are beginning to take proactive steps, including more regular and thorough audits, establishing robust internal controls and implementing strict gift-giving policies. Businesses must do everything in their power to manage internal controls and avoid non-compliance with regulations.

Sound controls and a culture of compliance are key to minimising the risks, and when a firm suspects that fraud may be occurring, decisive action must be taken. The prevention of fraud hangs on the predisposition of companies, investors and lenders to perform proper due diligence and institute an ethical corporate conscience.

United StatesRandall WilsonRGL Forensics

Q: To what extent are boards and senior executives in your region taking proactive steps to reduce incidences of fraud and corruption from surfacing within their company?

Wilson: One of the steps I have noticed is that the internal audit groups of corporations are proactively and aggressively investigating any aberrations in the financial results. For example, we have seen instances in which these departments are identifying anomalies such as excessive shrinkage in the inventory, accounts that do not reconcile, excessive voids, or missing sequentially numbered check numbers or invoices, and then investigating aggressively to determine whether there is fraud occurring. In some cases, these corporations are retaining forensic accounting firms to assist their internal auditors in these investigations.

Q: Have there been any significant legal and regulatory developments relevant to corporate fraud and corruption in your region over the past 12-18 months?

Wilson: In the US, the Financial Reporting and Audit Task Force of the Securities and Exchange Commission (SEC) announced last summer continues to dominate the landscape in the area of legal and regulatory developments. The mission of the SEC to protect investors and prevent accounting fraud is clearly being ramped up with the provisions of this task force. One of the interesting components to the task force is the establishment of new investigative tools to be employed by the SEC in its investigations. These tools are designed to detect aberrations in the financial information provided by corporations, which will serve as a foundational basis for further investigation. As is the case in the computer forensics world, these tools are becoming more sophisticated and prevalent in the fight against corporate fraud and corruption. Of course, the SEC will also continue to rely on tips from whistleblowers – protected by the Dodd-Frank Act of 2010 – regarding potential violations of securities laws in the states.

Q: When suspicions of fraud or corruption arise within a firm, what steps should be taken to evaluate and resolve the potential problem.

Wilson: The first step is to identify the appropriate level within the company to respond and investigate the suspicions of fraud and corruption. This requires an advance plan of action much like a disaster recovery plan for fraud. If no such advance plan has been established, it will be important to carefully consider the steps necessary to evaluate the suspicions of fraud or corruption. At this juncture, an outside professional may prove to be a valuable member of the evaluation and investigation team. Of course, much of this depends on the available resources of the entity and the circumstances surrounding the suspicions. It is important to maintain confidentiality and discretion during the early stages of these types of investigations in that suspicions of fraud and corruption may not translate into the discovery of an actual occurrence. Another important step is to protect and archive financial and other information of the organisation, most of which today is stored electronically, as the fraudster within often has access to critical financial information of the entity. And, of course, it is important for the investigation to be assertive in order to send a positive message that the assets and reputation of the entity are important to its management and board of directors, and that fraud and corruption will not be tolerated. From there, the specifics of the investigation are often custom designed based on the method or scheme employed by the perpetrator to commit fraud or corruption.

Q: How has the renewed focus on encouraging and protecting whistleblowers changed the way companies manage and respond to reports of potential wrongdoing?

Wilson: Companies have embraced the benefits of whistleblowers as important components to their internal control environment. And, they are finding that the protections afforded to these individuals have fostered more systems designed to promote this activity. Based on feedback we have received from some companies, it is apparent that these companies are looking for more efficient ways of screening and evaluating these anonymous tips to better discern those that warrant additional investigation.

Q: Could you outline the main fraud and corruption risks that can emerge from third party and counterparty relationships? In your opinion, do firms pay sufficient attention to due diligence at the outset of a new business relationship.

Wilson: The primary risks associated with third party and counter party relationships involve access to electronic information, as well as the ability of the third party to corrupt individuals within the company or extort assets from the entity. Recent cases involving two large firms engaged in the auditing and payment of freight invoices illustrate another risk in these relationships and that is access to assets, particularly cash. In these instances, the company advanced funds to the vendor to pay its freight invoices which provided the vendor with the opportunity to play the float on the funds advanced. As the scheme continued, the vendor continued to extend the float period and divert larger and larger sums of monies until the scheme collapsed. The result was millions of dollars in losses to the various customers of these vendors. In my view, companies have become more aware of these risks and are devoting more attention to the diligence they perform to approve vendors. In addition, many companies are employing analytical tools to periodically test for vendors that do not meet the standards of approved vendors or that have employees as officers, and so on. The risk remains, however, and companies must be continually diligent in their efforts to verify the legitimacy of new vendors.

Q: What advice can you offer to companies on implementing and maintaining a robust fraud and corruption risk assessment process, with appropriate internal controls?

Wilson: The best advice that I can offer is to implement the provisions of the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The internal control framework was recently updated by COSO in order to be more responsive to the increasingly complex environment in which businesses operate. The provisions of this framework are extremely comprehensive and would serve as a valuable foundation to any robust risk assessment and internal control structure. Of course, as with any such system, for the provisions to work effectively in preventing fraud or detecting fraud in the normal course, the leadership of the entity must be committed to the fight against fraud and corruption. Communication of the commitment of the organisational leadership reduces the risk of fraud, and increases the probability that employees, vendors and customers will report suspicious activity. It is important to know that the American Institute of Certified Public Accountants (AICPA) is a member of COSO.

Randall WilsonPartnerRGL Forensics+1 636 812 0292rwilson@rgl.com

Randall Wilson provides sound judgment and expert advice in a variety of situations to solve financial problems. Working with insurance companies and lawyers, Randy accurately, effectively and efficiently measures losses related to fraud and fidelity, business interruption, property loss, employee dishonesty and theft, marine losses, and subrogation. Mr Wilson’s more than 25 year career has covered claims and cases across a variety of industries, including manufacturing, hospitality, retail and consumer goods, ocean marine, professional services, and energy. A globally recognised financial forensic expert and certified fraud examiner, Randy has been featured in international publications and major media outlets.

As appeared in Financier Worldwide, Corporate Fraud & Corruption Annual Review, June 2014.